The study considers some of the factors determining budget balance. In particular, it
investigates the relationship between budget balance and inflation. The analysis focuses on
European states in the period between 1999 and 2007, and concludes that the relationship
between budget balance and inflation is not demonstrable. In the literature, attempts to
quantify the relationship between the two factors have faced severe difficulties.
Inflation influences both the revenue side and the expenditure side of the budget, often
increasing one and reducing the other at the same time. These effects might balance each
other out, leaving the budget balance unchanged.